Reject the Exelon-Pepco merger

James McGarry

The Maryland Public Service Commission should just say no to the Exelon/Pepco merger.

Woefully inadequate. Harmful to Maryland consumers. Not in the public interest.

These phrases were in no short supply as Maryland's Public Service Commission concluded its last round of hearings on the proposed merger between national utility behemoth, Exelon Corporation, and Maryland's local utility company, Pepco. The commission's five-day marathon of oral arguments ended with unanimous opposition to the merger coming from every state actor involved in these proceedings, including the commission's own staff.

Opponents to the merger now include Maryland's attorney general, the Maryland Energy Administration, the Office of People's Council, the Public Service Commission staff and a coalition of environmental, public health, business, faith, consumer and social justice advocates. To approve a deal like this without the support of a single state entity would be unprecedented. In the face of such overwhelming public opposition, the Public Service Commission should just say no.

So why are so many groups opposed to the merger? The first thing you need to know is that for the Chicago-based Exelon Corporation, this merger is all about nuclear power. Exelon owns the largest fleet of nuclear power plants in the country, with 24 reactors at 14 locations in Illinois, Maryland, Nebraska, New Jersey, New York and Pennsylvania. These power plants account for 63 percent of the company's revenue.

A few years ago, Exelon felt pretty good about its market position. In 2008, when the company's stock price was nearing its all-time high of $91.64 per share, Exelon's then-CEO John Rowe crowed to investors that "Exelon is uniquely positioned to deliver increasing value in long-term earnings growth." But then something unexpected happened: Electricity prices fell. A lot. Due to a confluence of market factors, wholesale electricity prices fell 45 percent between 2008 and 2013. And since power plants prefer high energy prices, Exelon's stock price has tumbled to around $34 per share today.

Pepco, on the other hand, doesn't own power plants. It owns wires. That means it doesn't care where the power comes from as long as it can deliver it and keep prices low. It's a low-risk business model with a guaranteed rate of return, and it's exactly the type of business that Exelon needs to shore up its ailing balance sheet.

And thus, the proposed merger. The benefit to Exelon is clear. The company's nuclear assets are over-exposed, and they're looking to earn safe money in the regulated wires market while exerting more power over the energy prices that are paid to their power plants. As for Pepco, Exelon is offering to buy the company out, in cash, for $27.25 per share. That's a 37 percent premium that will result in a $1.842 billion windfall for Pepco's shareholders.

But if you're a Pepco customer and not a shareholder, the new risks are huge. Maryland Attorney General Brian Frosh wrote in his brief to the Public Service Commission that "there is nothing in this nearly $7 billion transaction that is of tangible benefit to customers or Maryland's economy."

In fact, if approved, the merger would harm Pepco customers. The fundamental conflict of interest here is that Exelon would be in charge of keeping electricity rates low for Maryland customers while simultaneously seeking higher electricity rates for its nuclear power plants. And with its substantial new market power, Exelon could create advantages for those plants through its control over utility planning, investment and construction decisions. Exelon could also create unfair market outcomes by failing to identify energy sector innovations such as renewable energy technologies, energy efficiency and microgrids. In fact, Exelon publicly opposes many high-profile policies that would encourage renewable power at the federal and state level.

Furthermore, if the merger is approved, Pepco customers will have to assume a certain amount of Exelon's substantial business risks. Those risks could increase Pepco's cost of capital and draw resources away from needed utility investments toward other Exelon operations, which would translate into higher electricity rates for Marylanders.

In exchange for these risks, Exelon is offering a one-time $94 million "customer investment fund" and illusory benefits that are either already required by law or could be required by the Commission absent the merger. These conditions have all been rejected as insufficient by the Maryland government, and their proposed fund is just 5 percent of the windfall that Exelon would pay to Pepco shareholders. In truth, they are not offering better service. They're offering a pay-off.

If ever there was a deal that deserved to be rejected, surely this is it. The merger would benefit shareholders at the expense of Maryland ratepayers, and it would inhibit the growth of clean, reliable, and affordable electricity. Exelon has failed to garner any state government support, and it has attracted a growing coalition of local opposition.

Marylanders deserve better. The Public Service Commission should join the rest of the state and just say no to this merger.